Lululemon Athletica (LULU 1.31%) has likely helped mint a few millionaires since its public debut in 2007. A $20,000 investment in the Canadian yoga and athleisure apparel maker's initial public offering back then would be worth about $1.02 million today. The company has carved out a sizeable niche in the market with its high-end products, fostered brand loyalty with free yoga classes and other events, and expanded its direct-to-consumer business to curb its dependence on wholesale retailers.
From fiscal 2007 to fiscal 2022 (which ended last January), Lululemon's revenue rose at a compound annual growth rate (CAGR) of 26% as its net income grew at a CAGR of 25%.
That past performance was incredible, but can Lululemon keep it going and mint even more millionaires over the next two decades?
Image source: Getty Images.
What are Lululemon's long-term strategies?
Lululemon's growth was driven by the rapid expansion of the athleisure market, which blurred the lines between athletic and everyday apparel. It also established itself as a premium brand by selling its products at high prices and limiting its markdowns, and it's expanding beyond its core market of female shoppers with more products for men.
It's also one of the few retailers that continues to expand its brick-and-mortar footprint as many of its industry peers shut down their struggling stores. It ended the third quarter of fiscal 2023 with 686 stores, compared to just 254 locations at the end of fiscal 2013. That brick-and-mortar expansion, along with the growth of its e-commerce platform, enables it to now generate more than 40% of its revenue from its direct-to-consumer channels.
In 2019, Lululemon rolled out its "Power of Three" growth plan to double its digital revenue, double its men's revenue, and quadruple its international revenue from its fiscal 2018 levels over the following five years. It cleared its digital and men's goals ahead of schedule in fiscal 2021 -- even as it temporarily closed some of its stores during the pandemic -- and it quadrupled its international revenue by the end of fiscal 2022.
In 2022, it launched a new "Power of Three x2" plan with the exact same goals: It plans to double its digital and men's revenues again, as well as quadruple its international revenue, from fiscal 2021 to fiscal 2026. It expects that plan to nearly double its annual revenue from $6.3 billion in fiscal 2021 to $12.5 billion in fiscal 2026.
Lululemon is still on track to meet those targets
Analysts expect Lululemon's revenue to rise 19% to $9.6 billion in fiscal 2023, and they will find out if they were right when it posts its full-year earnings report on March 21. That gain would represent a slowdown from its 30% growth in fiscal 2022 -- but it isn't too surprising since most apparel makers have been grappling with tough inflationary headwinds for consumer spending.
A lot of Lululemon's growth in fiscal 2022 was driven by markdowns, but it reined in those discounts throughout fiscal 2023. Its growth in China also accelerated and outpaced the North American market. As a result, its gross margin expanded 230 basis points year over year to 57.8% in the first nine months of fiscal 2023.
During its third-quarter conference call last December, CEO Calvin McDonald said the company was still "well positioned" to meet its Power of Three x2 goals. From fiscal 2023 to fiscal 2025, analysts expect Lululemon's revenue to rise at a CAGR of 13% to $12.3 billion -- which suggests it should easily exceed its target of $12.5 billion in fiscal 2026.
Can Lululemon keep growing over the next two decades?
Lululemon's business is maturing, but the expansion of its direct-to-consumer channels, the introduction of new men's products, and its rising sales in China could drive its evolution into a more diversified athletic brand like Nike.
If it meets analysts' expectations and continues to grow at a more modest CAGR of 10% from fiscal 2025 to fiscal 2040, it could generate $50 billion in revenue by the final year. That would nearly match Nike's revenue of $51 billion in fiscal 2023 (which ended last May). Assuming its valuations hold steady, its stock would rally about five times from its current levels. That would turn a $20,000 investment into $100,000 -- but it probably won't make you a millionaire on its own.
Lululemon probably won't replicate its dizzying gains from the past 17 years over the next two decades. But it's still a solid play on the growth of the athleisure market -- and it still seems reasonably valued at 31 times next year's earnings.
